M&A Announcement

Aug 18, 2016

Slides

Ladies and gentlemen, welcome to the Granges acquisition on Noranda's Downstream Division Event Conference Call. Today, I'm pleased to present Johan Menkel, CEO and Oskar Helstrom, CFO. Afterwards there will be a question and answer session. I will now hand the conference over to Johan Menkel. Please begin your meeting, sir. Thank you. Yes, good morning, ladies and gentlemen, and welcome to Granges conference call. Here in Stockholm, it is me, Johan Menkel, CEO of Granges and CFO, Oskar Helstrom. Yesterday afternoon, we announced that the acquisition of Noranda's downstream division now has been approved by the U. S. Bankruptcy Court, and we have received the court order, meaning that it is finally a done deal for us. As you know, the sales hearing has been postponed a number of times this summer as there have been discussions about how the purchase price should be distributed among Noranda's creditors. Nothing that has any effect on us or the assets we are buying. Today, we would like to take the opportunity to explain the transaction in more detail and also answer any questions you may have. We are buying Noranda's downstream division in The United States. The transaction is structured as an asset deal, valuing the business and related assets to USD $324,000,000 on the debt and cash free basis that corresponds to an EVEBITDA multiple of 6.2 based on a pro form a earnings for 2015, meaning we are able to close this deal at a very attractive valuation. The acquisition is an important step towards realizing our targets for 2020, making Granges a truly global player in our industry. When summarizing this transaction, I first want to point out that the Noranda asset was our preferred target in North America. It has several advantages for Granges, which I will come back to shortly. As said, the price we pay makes this transaction a very attractive opportunity for Granges. Already the first year, the acquired asset is expected to contribute to earnings per share. The logic behind this deal is foremost about established own production facility in North America, which has been on our agenda since the IPO two years ago. We're not only getting a plant, we got one of the most advanced rolling mills in The Americas. At the same time, we are strengthening our position in the strategic HVAC and our market considerably and get access to the new attractive market segments within rolled aluminum products. The transaction is fully financed by bank loans from Sanske Handelsbanken and Danske Bank and there are currently new plans to utilize the mandate from the Annual General Meeting to issue new shares to help finance these transactions. Closing is expected on August 22, which is only a few days from now. A short update on what we are buying. The transaction includes the assets and related business conducted in Noranda Aluminum downstream division, which has a strong track in terms of sales and profitability. Noranda's other division, the primary aluminum production also referred to the upstream business is not included. These two divisions have historically been operated separately in the Noranda Group. Due to financial problems within the upstream division, Noranda initiated a Chapter 11 process in February. As a part of the process, Noranda was seeking to divest the downstream aluminum rolling division. Noranda's downstream rolling mills are located in Southeast United States, which is a very good location from a logistic perspective, close to their customers, but also close to most of Granges current customers in North America. Moranda's downstream division is a well managed business, which has a proven track record of several years with stable sales and good profitability. Last year, sales volume reached 172,000 tonnes, making it slightly bigger than Granges in terms of volume. Earnings before interest, tax, depreciation and amortization, EBITDA, was US52 million dollars on a pro form a basis. In that figure, we have included adjustments to mirror the conditions the downstream business would face being a standalone from Noranda. In total, the three facilities employs about five fifty people. Today, Noranda is serving a number of attractive niche markets where it holds a strong market position. About half of the sales volume goes to customers in the HVAC in our segment, of which a smaller part is for automotive heat transfer material. This is something we value high as we view the HVAC in our markets being one of our strategic end markets going forward. Today, Noranda has a number one position in this field in North America. Noranda also holds a number one position within transformer windings, while being a number two in the semi rigid container used for food packaging. The fourth segment is heat shields for automotive industry. Miranda's downstream assets consist of two aluminum rolling mills, the large one in Huntington, Tennessee and the smaller one in Salisbury, North Carolina. The Huntington facility was through a major expansion in year February, making it the most advanced and efficient rolling mill for light gauge materials in North America. The equipment constitutes a full production line from costing to cold rolling mills and finishing. That also goes for the smaller facility in Salisbury that has a full production line. Besides the rolling mills, Noranda have a small surface treatment plant in Newport, Arkansas. In this facility, additional properties are added to the rural aluminum in a chemical process. This is only a small complementary offer to some customers that require surface treatment. When looking at the logic behind this deal and why we view this as an outstanding opportunity for Granges, we expand this presence and create value for our stakeholders. I want to start with our current promise. Our vision is to transform the world through innovative aluminum engineering. Our business concept states that we should be a global aluminum company and the market leader in advanced materials for heat exchangers. Our ability to provide light and more designable solutions in order to increase economic efficiency is what is driving demand for our products today. At our Capital Market Day this spring, we presented updated goals and strategies for 2020. Our ambition is to show a high growth rate than the market, while maintaining a good and sustainable profitability. By 2020, we should be the market leader in all geographical regions. The acquisition of Noranda downstream is an important step towards this goal. We get our own production facilities in the region. We will also expand our presence into adjacent market segments, which has been on our priorities as well as strengthening our position in the HVAC and our markets. On top of that, we get a very well run business that already today have a clear focus on efficiency measures and being a sustainable link in the value chain, including health and safety, thus contributing to maintaining a good and sustainable profitability. We have summarized the main strategic rationale behind this deal, although the list of benefits for Granges is long. First, with Noranda, we get one of the most advanced rolling mill in North America. The new production line at the Huntingdon facility is one of the best assets in this class. We also get a highly experienced and skilled organization that has proven to manage these operations very well in recent years that is of course of great value. The Noranda and in particular the Huntington facility will provide an excellent platform for our future growth in North America. It also means we will be able to reduce the risk and cost of supplying our existing customers in North America. Secondly, I would like to highlight Noranda's strong position on the North American HVAC and R market. Today, Noranda is the number one supplier in this field. HVAC and R is a strategic end market for Granges. With a strong customer base in this area, we will be well positioned to drive conversion to the braze technology solutions. And third, with Noranda, we get an existing business in adjacent segments within aluminum rolled products, segments where Noranda today has a very good market position. For us, this means that we will diversify our business portfolio and at the same time strengthen our position in the overall market for rolled aluminum products. Just very short on the combined company presence, Granges is today serving a global market from two production facilities, one in Shanghai, China and one in Finspang, Sweden. The Americas has so far been a white spot for Granges in terms of production. With many large global customer, it is important for us to be a global player and offer local production on all major markets. As you can see, the geographical fit between Granges and Oranda is very good for establishing a truly global company. In Zooser, we will have a combined production capacity of some 400,000 tons spread over three continents. Local production in North America is key for us to be able to gain market share in automotive heat exchanger materials in this region. Since Noranda already today have some smaller volumes going into automotive heat exchanger materials, our market share in North America will increase a few percentage points already day one. However, mid to long term, our ambition is expand capabilities on-site to be able to also produce clad products. While Veranda today have a full production line for un clad product that is efficient and serves the purpose very well, certain upgrades will be necessary to be able to produce the same kind of multilayer products we do in Finspang and in Shanghai. That will require that we add the direct chilled casting and hot rolling mill. Our plan is to start a pre study regarding this upgrade after closing to be able to evaluate and prepare for possible future investment. The pre start is anticipated to take one to one point five years to conclude. However, we will not start any larger investment projects until our net debt is back on our target range, one to two times EBITDA. As said before, Noranda's downstream operation was our shortlist of targets for the expansion in North America. We have been looking at these assets before and when they came up for sale this spring, we immediately view this as a great opportunity for Granges. And it's easy to line up benefits we see with this transaction. The strong management team and highly experienced organization is of great value. We get production facilities that is very efficient and have a good location from a logistics perspective. And the importance, there are further land available at the Huntington facility, which makes an upgrade possible later on. Altogether, these factors will reduce our risk and time to market for us in The Americas. I also want to highlight Noranda's strong position in the HVAC and R market. HVAC and R is a strategic end market for Granges and growth area for us in the coming years. While the automotive market is already fully converted to braze technology due to superior properties when it comes to efficiency and reduced environmental impact, the HVAC and R market is still using the old technology. We foresee a conversion also in the HVAC and R market in the coming years as the requirement on these units will increase due to new legislations. Today, only a few percent of the market are converted to braze technology. A reasonable estimate is that about half of the market has potential to convert to braze technology in the coming years. Noranda holds a number one position within HVAC and R in North America with the market share representing more than half of the market. For us, this means that we get access to very attractive customer base by serving these customers, Granges will be in a good position to further drive the conversion towards brazed heat exchanger in the HVAC in our industry. At the same time, we will be able to enjoy current business until the conversion is achieved. Our ambition is to take a leading role in the future development of this market and together with our customers develop new efficient materials and solutions in this field. This slide illustrates Granges today and the combined Granges and Noranda businesses and show that we will get a more diversified business portfolio post transaction. Heat exchanger materials for automotive, which is more than 90% of our business today, will be less than half of our volume. When looking at the sales split for twenty fifteen numbers, at the same time, product for HVAC and R segments will increase, bringing the share of heat exchange material to around 70% for Granges. Granges will get a more balanced business portfolio, creating a larger and stronger platform going forward. We also get less dependent on a certain end market segment, less spreading our risk both geographical and end market wise. This doesn't mean we will pay less attention to the automotive going forward. On the contrary, it will allow us putting even more efforts in this area being a part of a bigger and stronger global company. When looking at Granges and Roundup downstream combined, we will form a company with a strong earnings and cash generation. Sales volume on a pro form a basis for 2015 was 336,000 tons, double the size of Granges. Net sales was USD 1,200,000,000.0 or more than SEK10 billion. Adjusted EBITDA sum up to SEK1.2 billion on a pro form a 2015 basis. And we expect this business to continue to show a positive result, meaning it will be accretive to earnings per share already the first year. Looking at 2016, we expect the acquired business to be neutral in terms of earnings per share if you take into account the cost we have had and we'll have for this transaction, including integration costs. In Q2, we took $5,000,000 in cost for the acquisition and we expect about the same amount of cost to occur during 2016 as the transaction and integration is being finalized. The transaction is fully financed with bank loans from Sanske Handelsbanken and Danske Bank that provided a term loan of 300,000,000 In addition to that, we have signed an agreement for a multi currency revolving credit facility of SEK 1,200,000,000.0 for general corporate purposes. The term loan and RCF is on prevailing market conditions. We expect our financing costs to increase by SEK 20,000,000 per quarter given today's base rate and FX rates. Granges net debt was 300,000,000.0 at the June this year, including the new debt financing, we would have a net debt of about SEK 3,100,000,000.0 that corresponds to about 2.5 times EBITDA, including pro form a numbers for 2015 for Noranda downstream as a standalone entity. We estimate that we will be back in our target range of 1.2 times EBITDA already in 2018. Currently, there are no plans to utilize the mandate given by the Annual General Meeting to issue new shares in Granges. We have formed a new organization in North America. As was announced this morning, Patrick Lawler has been appointed President Americas for Granges effective as of closing of the transaction. Patrik will be a member of the Granges Group management team, and I'm convinced Patrik is the right person heading our American operations going forward. He has a great experience that is valuable for us, both when it comes to our industry, the American market and to integrate acquired businesses in a successful way. I'm glad Patrick has accepted to take on this position. Daniel Dost, former President Americas will continue as Vice President, Sales of Automotive Heat Exchanger in The Americas. Scott Krop, currently heading the Noranda downstream operations will take on the position as COO at the time for closing. We are very happy that almost all key Noranda employees has accepted to continue in the new Granges America organization. To conclude this presentation, we are pleased to announce that we have been able to close this transaction at a very attractive valuation. The price we pay values the Renamda downstream operation to USD $324,000,000 on a cash and debt free basis, corresponding to an EVEBITDA multiple of 6.2 times pro form a 2015 earnings. Noranda downstream has been on our number one target when looking for expansion opportunities in North America. And as said earlier, this come up with a number of advantages for Granges. We will get the production footprint in North America we have been longing for and at the same time, strengthening our position in the HVAC and our market considerably. We will also broaden our portfolio with new attractive end market segments. This acquisition is an important step towards our goal for 2020, making Granges a truly global player in the aluminum rolling industry. Thank you for listening this morning. And now we are ready to open up for questions. Thank you, sir. The first question comes from John Holton from Handelsbanken. Please go ahead. Your line is now open. Thank you. So my first question is on on the ramp and capacity. It seems like they are running on almost full rolling capacity. So I wonder what is the opportunity here to increase capacity and particularly melting and die casting capacity. How does that look? Hi, Jurgen. This is Oskar Helstrom speaking. I think that it's a very good observation there. Mean, Noranda is running and Noranda Downstream is running at a high capacity at the moment and has been doing so for the last couple of years. And I think in regard to this, I think we can comment that the reason for this is of course that they have been very successful in filling this business and also optimizing the usage of the capacity. That said, I mean, we are acquiring this business to get a foothold in North America and we intend to further develop it. It is not unlikely that additional capacity can be released by rather modest investments, but this is something that we have to determine and confirm later on. Okay. But if I understand it right, the expensive part is melting and die casting capacity. Those types of investments are the expensive ones. And to add some rolling lines is less expensive. So how does the melting and die costing capacity look like? Very good question. I think there are two things we need to separate here, course. One, I mean, capacity is very dependent on the product mix also and what type of products we are running. And as Johan also mentioned earlier, in the longer perspective, we have the intention to continue to develop this business in order to also produce cladded material. And in order to do that, you need to invest in basically direct chill casting and hot rolling and that are two capabilities that Noranda currently not have. That would be relatively large investments, you're right. And we are starting a pre study to determine what type of investments we would have to make and exactly what those would look like. I think what we can say that in the order of magnitude, if you want to add these capabilities in a longer perspective, it's an investment of 150,000,000 to $200,000,000 or so. But again, I think we also need to reemphasize here that this is a longer term perspective. We have no intention of making such an investment before we had finalized the sort of pre study and before the net debt will be back in our target range. Just to make sure that I understood this correctly, so to get production capacity in place in The U. S. For your cladded material investments of 150,000,000 to $200,000,000 in that range would be required? If you want to have the full production chain, meaning then investments in direct chill casting and hot rolling, that is an order of magnitude number for that. That doesn't mean that we cannot produce clad material in North America by shipping semi finished products from our current production in Sweden or China and finalize the products in North America. So this can be done in steps as well. Okay. So you could do the cold rolling in America, melting and die casting and hot rolling in your Finspang or Shanghai facilities? That is certainly an option, and that is an option that is already better, of course, than our current setup. So yes, that's right. And yes, hold on. Johan here. I mean, capacity very much depend on product mix, thickness and weight, etcetera. And of course, there is a potential to review the product mix and there is also potential for us to release bottlenecks in the current footprint. I think it's important to also say that this platform is an excellent platform for further expansion. We have the infrastructure, land and workforce, etcetera, and that is and foundations in buildings. So I mean, that means, of course, that you could also increase capacity with minor investments going forward. And that is something that we, of course, we look into immediately after closing. But there's no melting or die casting capacity in Noranda that you could use and that add on your hot roll your hot rolling and cold rolling capacity to to produce your your clad materials today? Noranda has costing capacity. And one of the things we will look at in our pre study, of course, is how this can be developed further. I mean, we need to highlight here that Naranda is a business that has a full production chain from A to Z basically in terms of rolling production. So there is no immediate investment needs, of course, to continue the current business. Sorry to linger on this, but just I'm just trying to understand. So if you look at the Salisbury facility, for example, which seems to be to have the full production change, could could that be converted by adding some hot rolling capacity and and the the cold rolling that you want for your core assortment in Europe or China? Could that particular plant be converted without new casting and melting capacity investments to produce cladded material? You would have to make investments also in the casting field, I mean a lot of the equipment that you need to do aluminum rolling is in place in both the rolling facilities of Noranda. So there are both facilities can be converted to cloud production and both are very good aluminum rolling mills. Interesting. And then my final question, is there a big difference in the profitability of the Huntington plant and the Salisbury plant? I think that the way Noranda has operated these two mills in the past is like a system. So basically, have optimized production across these two plants and looked at the profitability on a total level rather than individual plant. And of course, it's a question for Granges how to operate this going forward. But what we can say is that this is a system that works very well today. Okay. Thank you. That's all for me. Thank you. Thank you. The next question comes from Kenneth Tond from Carnegie. Please go ahead. Your line is now open. Thank you. I have two questions. One is on cost synergies. Is there anything you can do by combining these assets in terms of purchasing or in terms of logistics in North America or back office administration there? That's the first question. And the second one is, what kind of depreciation do you think will be in the Noranda operations? I'm sorry, a third question is how will you report this? Will Noranda be a business unit or will you include the shipments and sales and so on in your Granges North American operations? Kenneth. It's Oskar here. Very good question. I think in terms of cost synergies, I mean, since Granges only have a small sales company in The U. S. Today, the cost synergies from combining Granges and Noranda businesses in North America will relatively small. But of course, we will combine back offices and so forth, but this is not a big cost item in the beginning, I mean, at this point. The synergies, I will say rather will occur from the fact then that this gives us a manufacturing base in The U. S. And a stronger position in the market, something to build on from a commercial perspective rather than just cost reductions. Regarding then your question on depreciation, I think it's a little bit too early to comment on exactly what this will be because we haven't done the final purchase price allocation on the individual assets yet. I mean, as an indication, the historical depreciation of the assets that we have acquired when they were owned by Noranda was about $16,000,000 or slightly lower than SEK 140,000,000 per year. It's likely to believe that this depreciation will be slightly higher going forward as there is a difference between the current book value of the assets and the purchase price. You can see this as an indication, but it will most likely be a little bit higher. In terms of reporting, we only have one segment today as you know. Miranda will be included in this segment and reported as a part of the Americas region. We intend to explain the contribution and so forth from the Miranda, but it we will not report it as a separate segment or business area, at least not initially. But I also think that when doing this type of relatively large transaction, it is natural that the segment reporting is evaluated and this is something that we may do later on. But you will at least report the sort of the Granges product tonnage in North America and also the Noranda tonnage in North America to begin with? Yes. Initially, we will for sure separate between the two, so it's possible to see what the acquisition is contributing with there. That's good. Thank you. Thank you. There appear to be no further questions. I'll return the conference back to you. Okay. Yes. Thank you everyone and for calling in and for interesting questions. Of course, the next update we will have is when we will release our Q2 Q3 report on October 27. So, thanks a lot for calling in today and looking forward to the next